When to Buy Silver and Gold

Includes: AGQ, GLD, GLL, SLV, UGL, ZSL
by: Yatin Karnik

U.S. gold rose to a record high for an eigth straight session on Monday, its longest string of record highs since January 7. The metal's rise was modest -- gold rose $2.10, or 0.14%, to close at $1,506.70 an ounce. Gold prices hit an intraday low of $1,501.90 and a high of $1,517.90 an ounce. In recent weeks, gold has been making higher highs and higher lows. Today's high of $1,517.90 an ounce, marks a record high for gold. When a commodity makes a new high and then reverses intraday and closes near the low of the day it is called outside reversal. Both silver and gold had outside reversal days on Monday.

(Click to enlarge)

Gold prices just below its Bollinger band's upper band. The Relative strength indicator is sitting at 74.16. Technically, gold is overbought on a daily chart. Bears have an advantage over bulls and their next near-term downside price objective is closing prices below solid technical support at last week's low of $1,477.80.

Silver futures prices for May delivery, now the most active contrast, rose a mere $0.29, or 0.62% for an eighth straight session as well, to close at $46.86 per ounce on the Comex in New York. Silver prices hit an intraday low of $45.66 and a high of $49.75. Silver made another 31-year high in Monday's session.

(Click to enlarge)

Volume in May for silver was about 199,000 contracts whereas gold volume was 109,000 contracts. It’s a rare event when silver volume outpaces gold. Silver's rise has been parabolic. For a healthy bull market, it is best if silver does not go up in a straight line. Silver and gold both have gone up eight straight trading sessions and hence a short correction is warranted. That’s not to say the overall fundamental picture has changed. I think both metals will resume their climb higher in days to come, but they are setting up for a leg lower before heading higher again. If you are an investor looking to store some of your savings in either gold or silver, I wouldn't hesitate getting long at these prices. But if you are a trader trying to make money from daily or weekly swings, I think an excellent buying opportunity will present itself within next day or two.

It's not a surprise for anyone that silver has been outperforming gold in recent weeks and months. I have no doubt that silver will continue to outperform gold in coming days but the same outperformance applies to silver on the downside. Silver might lose more in dollar and percentage terms as compared to gold. As mentioned in my earlier article, please use caution before opening any new long position in precious metals before Wednesday, April 27. On Wednesday, Federal Reserve will convene a meeting. Any clarity on a QE3 or specifics on changes to QE2 could bring volatility for precious metal prices. If Ben Bernanke sticks to his gun and continues with QE2 without any concerns about inflation, that might skyrocket silver prices. If dollar weakness rattles the Fed enough to consider squeezing money out of the market, this could put downward pressure on silver prices. In my opinion, longs in precious metals have nothing to worry about in the foreseeable future.

So when should an investor buy gold or silver?

Now is a good time, as any other.

And when should a trader buy gold or silver?

Buying silver between $43 an ounce to $43.50 an ounce, seems a good buy and also seems a good bet technically. Gold between $1480 an ounce to $1485 an ounce might be compelling for a trade.

For the long term investor, silver is undoubtedly heading higher. But for a swing trader, silver will pose an excellent buying opportunity to get long at lower prices in coming day or two. I think silver and gold, both will settle the week higher.

If you believe in the gold and silver story, you can take advantage of the climb in gold prices by getting long exposure to GLD (iShares Gold Trust) or UGL (ProShares Ultra Gold). You can also benefit by getting short exposure to GLL (ProShares UltraShort Gold). You can take advantage of the climb in silver prices by getting long exposure to SLV (iShares Silver Trust) or AGQ (ProShares Ultra Silver). You can also benefit by getting short exposure to ZSL (ProShares UltraShort Silver).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLV, GLD over the next 72 hours.